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Broader markets outperform benchmarks; are midcaps more attractive than largecaps now?

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Broader markets outperform benchmarks; are midcaps more attractive than largecaps now?

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After a rough patch of over 2 years, the broader markets have started to recover in the last few months.

Broader markets outperform benchmarks; are midcaps more attractive than largecaps now?
After a rough patch of over two years, the broader markets have started to recover in the last few months. Just in the last month the Nifty Midcap and Nifty Smallcap indices outperformed benchmarks, rising 9 percent and 12 percent, respectively. In comparison, the Nifty added only around 4 percent in this period.
On a YTD basis as well, the midcap and smallcap indices are down 3 percent and 6 percent, respectively as compared to a 7 percent decline in Nifty50.
Also, In August, so far, the Nifty Midcap 100 and the Nifty Smallcap 100 have gained 6 percent and 8 percent, respectively. The blue chip-focused Nifty is up only 2 percent.
So does this outperformance signal recovery in the broader market space? It seems like the large caps are taking a breather while the midcaps and small caps charge ahead.
According to a report by Axis Securities, midcaps are now looking more attractive versus large caps. Currently, midcaps are trading at similar valuation as compared to large caps which indicates risk-reward ratio has moderated, it added. Two quarters back, midcaps were trading at 20 percent discount to large caps.
It sees midcaps and small-cap performance slowly picking up and believe that once the volatility index settles below 20 then midcaps and small caps are likely to see significant outperformance.
"We continue to believe that allocation to mid and small caps will result in decent returns over the next 12 months," it added.
Other experts also believe that the outperformance by the broader markets is on the back of the rise in retail investment. Retail investors are moving towards the midcap and smallcap space, which is undervalued compared to higher valuations in the largecap stocks, they added.
However, most analysts advise a stock-specific approach in this volatile market and to look at quality stocks with strong fundamentals instead of just focusing on cheaper options.
In the midcap space, stocks like Escorts, IPCA Labs, Ajanta Pharma, Tata Consumer, Muthoot Finance, and Jubilant Life Sciences have jumped over 50 percent in 2020, lifting the index.
Meanwhile, in the smallcap space, Laurus Labs, Suzlon Energy more than doubled investor wealth in 2020, surging 195 percent and 116 percent, respectively. Other stocks like Rallis India, India Cements, Deepak Nitrite, IRB Infra, Strides Pharma, and ITI rallied over 50 percent each in this period.
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